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For many of us, college graduation was a rite of passage. We’d spent what seemed like a lifetime completing undergrad course requirements. Armed with our diplomas, the “real world” and our professional lives were now ahead. Meanwhile, our college memories slipped into the rearview mirror.
Unfortunately, today’s college graduates face a weak job market with less professional opportunity. To make matters worse, an unprecedented number of them are saddled with student loans. In this post, we’ll examine the student loan conundrum and its implications for the lives of our nation’s recent college grads.
A 30 Year History of College Tuition in the U.S.
Since the 1980’s, tuition costs for both public and private colleges have risen much faster than the inflation rate of the broad economy. In fact,when compared to just a decade ago, the price tag of attending a public college has more than doubled. As a result, the number of students taking out loans to pay for their post-secondary education has increased as well. In other words, rising costs have translated into skyrocketing student debt.
A Degree at Any Cost
So who has underwritten most of our nation’s student loans? Up to this point, Uncle Sam has accounted for 90% of the student loan market. But these loans have come at a price. Consider the following facts:
Leaving Loans Behind
Unfortunately, recent studies show that student debt is falling more and more on the shoulders of those who will never reap higher education’s rewards. For example, college dropout rates are rising and so are the number of older borrowers and retirees who are burdened by their own educational debt. In fact, individuals over 50 years old owe nearly 20% of outstanding “past due” and “in delinquency” student loans *. And both young college dropouts and older debt holders are less likely to be willing or able to repay their student loans.
A Leaner Future For Student Loans
Amid a sluggish economy and jobs market, default rates on federal student loans have been increasing. And economists expect the number of student loan defaults to rise as well. Many also believe that defaults will add to an already inflated level of U.S. government debt.
Among elected officials in Washington, the student loan quandary is a politically thorny subject. Congress recently scrambled to add a one year extension to the 3.4% interest rate for some federal student loans—a mere two days before the rate would have climbed to 6.8%. This last minute move postponed the doubling of the subsidized student loan rate, which is now scheduled to take place on July 1, 2013.
What’s Next and What Does It Mean for Me?
Given the current U.S. government debt conundrum and the increasing number of defaults on existing student loans, we must come to terms with a future in which there will be less subsidized student loans available. For those students who do qualify, they should expect costlier financing terms when compared to those of the past decade.
To make matters more complicated, there seems to be no end in sight to tuition costs that will vastly outpace the income growth of most American families. As a result, households seeking to pay for college will need to plan further in advance and save more in order to cover tuition costs. Fortunately, our nation’s higher education system provides us with many choices. In an environment where student loans are limited, those with college plans could attend community colleges, they could live with their parents during their undergrad years, or both. It’s important to remember that no matter how difficult our circumstances, there are almost always choices and decisions within our control, which will allow us to make our financial goals and aspirations a reality.
* Source: Barclays Economic Research
On June 28th, the Supreme Court upheld President Obama’s sweeping healthcare overhaul, formally called the Patient Protection and Affordable Care Act (ACA) and often referred to as Obamacare. The ACA is intended to ensure access to health coverage for all Americans. The Congressional Budget Office estimates that under the law, eventually 94% of legal residents will have health coverage- up from 83% today. Obamacare accomplishes this, in a nutshell, by taking money from some and giving it to others.
The Supreme Court’s decision ended months of speculation that regularly made headline news. We now have a clearer picture of what health care will look like for Americans. In this blog post, we’ll provide answers to the biggest questions about Obamacare.
Where will I get my health insurance?
Most people will continue to access health insurance the same way they are currently:
Will my health insurance premiums go up?
Most consumers can expect to see increases in their premiums and co-payments. This is because the underlying cost of healthcare is expected to rise. On the other hand, older people could see their premiums go down because of new rules imposed on insurers.
When will this go into effect?
A tax on investment income will go into effect in 2013. The health care law will be enacted in 2014. This is when most Americans will be required to carry insurance or pay a tax.
What’s the penalty for not buying health insurance?
All of us understand the concept of paying taxes when we purchase consumer goods like groceries or airline tickets. But after the Supreme Court’s ruling late last month, we now must get used to the concept of paying a tax if we do not buy something—health insurance in this case.
If you don’t buy insurance, you’ll be subject to a tax of $695 per year or 2.5% of your annual income, whichever is greater. According to the Congressional Budget Office, only about four million people will choose to pay this tax.
How is the new law being funded?
Through a combination of measures such as:
How am I impacted if I’m a high-income earner?
Starting in 2013, individuals making more than $200,000 annually and couples making more than $250,000 will see a 0.9% increase in their income taxes and a 3.8% tax on investment income (capital gains, interest, dividends, etc.) above those thresholds. Individuals who earn more than $250,000 and couples that earn more than $500,000 in capital gains on the sale of a primary home will also pay a 3.8% tax on that gain.
Can I do anything now to lessen the tax impact?
If you are a joint tax filer with more than $250,000 in adjustable gross income, it may make sense to accelerate investment income into 2012 and consider converting from a regular IRA to a Roth IRA. Consult with your financial adviser to see if this is an appropriate course of action for you.
Is the law in place for good?
The Supreme Court’s recent decision upheld Obamacare, but its future depends on which party controls the White House and Congress after November’s election. Republican presidential candidate, Mitt Romney, has pledged to overturn it if he is elected.
As the chart below shows, the growth in US per capita health spending has been slowing over the past 50 years:
As we’ve shared in previous posts, given the size of our government’s current debt and deficit, we should expect that Uncle Sam will charge higher taxes as well as provide a lower level of benefits. Healthcare costs, which have exploded in recent years, are an example of how we’re paying more just to keep up with current levels of service.
After an optimistic start to 2012, last Friday’s jobs report marked the fourth consecutive month of disappointing employment growth. It’s no secret that the labor market has been struggling since the financial crisis in 2008. But what’s less commonly reported is the dramatic shift that’s taking place in our nation’s employment landscape. In this post, we’ll look below the surface of today’s job market. We’ll explore how different generations of Americans are being affected by current employment conditions, and how many of us are adapting to a new job market paradigm.
The Young And The Jobless
According to June’s lackluster employment tally, only about half of the job losses from the recession have been recovered. Meanwhile, nearly 1 out of every 3 households has at least one family member looking for a work. But what’s worse is how the economic slump has hit young Americans. Consider the following about those who are entering the workforce:
The stark reality is that many recent college grads are saddled with student loan debt, and they’re unable to find employment within their chosen educational paths. In fact, the latest research shows a rising trend in the number of 20-29 year old college graduates working in positions that don’t require higher education. For example, it’s common for recent grads to work in the retail and service sectors.
Less Opportunity and Lower Wages
For those young people who have been fortunate enough to find jobs after graduating from college, there’s yet another obstacle that they face. As you can see in the chart below, annual growth in hourly earnings has dipped to historic lows.
Older Workers: Sticking Around
While the tough economy has kept many younger people out of work and recent college grads in jobs that don’t require a degree, it’s also had the effect of forcing older workers to postpone retirement. Despite the official end of the recession in July 2009, many older workers can’t afford to retire. Therefore, they’ve continued to work past retirement age. In fact, as the chart below illustrates, the number of 70 to 74 year olds working full-time has increased by nearly 33% since 2008. The low retiree turnover rate is one reason behind the decreased amount of job opportunities available to young people.
Making Tough Choices
Today’s job market is affecting the young and old in different ways. Regardless of your stage in life, the recent employment indicators point to how we, as a nation, are still feeling the effects of an economy in recovery-mode.
The most important thing to do right now is to adjust to changing circumstances without letting our emotions hijack our ability to make good decisions. For a recent college graduates, this could mean moving back in with parents while actively searching for a viable career. For Baby Boomers and beyond, this may mean working past retirement age in order to build a healthy nest egg.
As life after the Great Recession has taught us, the only certainty in life is uncertainty—things will never turn out exactly how we envisioned. Leading our one best financial life requires that we constantly evaluate our options as well as the tradeoffs and adjustments we must make.
Todd Eklund Gluskin Sheff Research  Bloomberg Businessweek
It typically takes months, even years, to assess the total cost of massive natural disasters. The same goes for financial catastrophes as well. No doubt that the Great Recession was the financial equivalent of a Hurricane Katrina or Japanese earthquake and tsunami, and we’re still feeling its effects. The fallout, years later, is the subject of our blog post.
Recently, the Fed published its Survey of Consumer Finances, which is released every three years. The report quantified how the Great Recession impacted the lives of millions of families across the U.S. It pointed out the following:
Next, the chart below tracks household net worth from June 2002 to December 2011 as a percentage of disposable income.
If you’ve ever wished that you could travel back in time, the Great Recession has fulfilled your request. As a result of the economic downturn, 2012 household net worth has returned to 1992 levels. But this news is no surprise to millions of homeowners. Over all, between September 2007 and September 2010, U.S. home prices fell 22%¹. And those who live in the south and west bore the brunt of the real estate bubble’s burst.
The Great Recession is a painful reminder of the saying “The only certainty in life is uncertainty.” The 40% net worth decline for households across the country shows that your financial life is never static. It’s influenced by external forces (such as recessions) and by internal forces (such as your employment status, a marriage, or a divorce). Leading your one best financial life is a journey of discovery. It requires constantly adjusting to changing circumstances that you have no influence over. But most importantly it’s a reminder that we are all ultimately responsible for our own well being and we have to be actively involved in making ongoing adjustments to maintain and live the life we really want.
Sam Miller and Joe John
European Commission Agrees to Direct Bank Bailouts, But With Conditions… Following a week of bad news from Europe, The Wall Street Journal reported that the 19th European Summit on the crisis in the Euro zone yielded a pledge to allow the direct bailout of private banks, but only after an irreversible path is set for pan-European oversight of banks.
What it means – Any agreement to funnel more money to troubled European banks is going to fuel a speculative fire, and that’s where we are. The agreement, which is broad in scope and preciously skimpy on details, outlines how the new European Stability Fund (ESF) can send money directly to banks, however countries must agree to have their banks overseen by a new regulatory body that is not yet set up. Keep in mind, that this continued separation of countries from control of their currency and now their bank regulation is an erosion of national sovereignty. What happens under the new structure when a Spanish bank stumbles? Are the Spanish investors wiped out by a German-run European banking regulator? How’s that going to work out?
Affordable Care Act Upheld…The Supreme Court upheld most of the Affordable Care Act, setting the stage for greater access to insurance, increased taxes on pharmaceutical and medical device companies, and the requirement that all purchase health insurance.
What it means – Stepping away from the constitutional argument, the affect financially is a wealth transfer from the young to the old. There is no question that the people in the crosshairs are young men ages 18-35 who do not buy health insurance because they don’t use it. The government needs their money to pay for the rest of us. The end result is an immediate reduction in standard of living for young adults, as they must pay -either a premium or a penalty (ahem…now called a tax!) – and most of them will get nothing in return. It’s hard to see how this group will fund our next wave of home buying and spending if we keep taking more from them.
U.S. Government Raids Corporate Pensions… According to The Wall Street Journal, Congress is set to pass a law that pays for Highways and Student Loans with money from corporate pensions by reducing the required contributions to pensions thereby boosting corporate profits and taxes.
What it means - The Highway Transportation fund is broke again. Students were given a 50% break on their loan interest back in 2007, and Congress wants to extend the giveaway. Doing this by creating more taxable income through reduced pension payments begs one question –
“Who’s watching out for current and future corporate retirees?” The answer? No one. This is how we get into trouble.
Stockton Goes Belly Up, North Las Vegas Declares State of Emergency… According to The Wall Street Journal, Stockton California called it quits, noting their high cost of pensions and benefits. The City of North Las Vegas, Nevada declared a state of emergency with regard to its pension payments, pointing out that to continue such payments would lead to mass layoffs of public safety workers, endangering the public.
What it means – Stockton’s move was well-telegraphed, but it doesn’t have a clear ending. Vallejo, CA went through bankruptcy filing, but emerged with its full pension and benefits intact. Today, the city still struggles. As for North Las Vegas, you have to love their creative approach. Unfortunately, it’s been tried elsewhere and failed in court. Look for more municipal bankruptcies ahead.
Mexicali Builds Medical Tourism… According to the Wall Street Journal, Mexicali, the town across the Mexican border from Calexico, CA, has built up a nice business of offering surgeries, dental work, and optical services to those willing to cross the border for care.
What it means – Medical tourism is something we have talked about for years. Expect it to grow exponentially in the future as more Americans choose lower cost options to what is available here at home. The Affordable Care Act will most likely cause medical tourism to grow, not shrink, as care facilities deal with an influx of patients and new ways of rationing services that renders many procedures “elective.” Those with the means will find the way…even if it involves a passport. Just look to Canada as an example.
Doug De Groote, Managing Director MBA, CFP®
Managing Director, Westlake Village, CA
Last week the world watched as Greek voters headed to the polls in an election that many believed would define the future of the Euro. Since the onset of the Greek debt crisis, the country has undergone massive spending cuts, which in their wake have left massive economic and social instability. In this post, we’ll examine the Greek financial meltdown, and what it can teach us about our own financial lives.
Political Instability, Financial Uncertainty
Up to election day, Greek citizens were polarized in terms of how to address the austerity measures that were part of the bailouts they received from their Eurozone partners and the International Monetary Fund. As you can see in the chart below, Greece remains in a precarious place as its unemployment rate has soared above 20% following nearly 4 years of recession.
Earlier in the year, several public polls indicated that the majority of Greek citizens preferred to keep the Euro and endure the harsh cuts required by the debt bailout. But as the June elections drew closer, Greek political support for radical socialist leadership began to strengthen. Alexis Tsipras, a 37 year old former student activist, emerged as a frontrunner for the Greek socialist party, Syriza. As part of his campaign, Mr. Tsipras promised to revoke the terms of the original bailout the country had agreed upon.
In the end, Mr. Tsipras and his coalition did not claim victory. Instead, Greece’s more moderate New Democracy party arose the winner from last week’s election. As a result, the immediate threat of a Greek exit from the Euro has eased. Furthermore, the imminent fear of a domino scenario, in which larger countries such as Portugal and Spain might leave, has also subsided—at least for the near term.
What Greece Can Teach Us About Our Personal Financial Crises
While none of us are going through the austerity measures that Greek citizens are experiencing, most of us have probably encountered our own financial crises. For example, we may worry about our future spending, or how we’ll meet our retirement needs. Or we may wonder whether we’ll require a personal bailout if we can’t fund our children’s college tuition. The most critical step in dealing with any financial dilemma is to establish a clear set of goals and priorities; these will drive the decisions or adjustments we’ll make. In Greece, both its citizens and political leaders remain sharply divided in terms of how they’ll lift their country from its fiscal malaise.
Always Make Honest Analyses
As Shakespeare said, “No legacy is so rich as honesty.” When evaluating our financial decisions, it’s crucial to perform an honest analysis of our circumstances and the options we have at our disposal. So often, the truth hurts. But refusing to honestly assess our present state of affairs can make a bad situation even worse. For instance, amidst Greece’s financial meltdown, the country’s politicians had gone so far as to provide fraudulent budget statistics to other Eurozone countries in order to postpone austerity mandates and to qualify for more bailout funds*.
The graph below illustrates that wages paid to Greek workers have increased at a staggering rate over the past decade—despite the fact that Greece’s economy and its output are a fraction of the size of its European neighbors. In other words, the Greek government provided subsidies and an artificial level of support to its citizens, both of which the country couldn’t actually afford.
Consider the following analogy: One worker lives in a state whose local government promises that he’ll earn $40 per hour to work as a part-time cashier at McDonald’s. Meanwhile, someone else lives in a neighboring state and earns $24 per hour to work full-time making BMW’s. At the most basic level, this example explains the current wage conflict that exists between Greece and some of its European counterparts.
Since the start of their debt crisis, Greece’s citizens have been struggling to figure out how to address the drastic changes and actions that are required to improve their country’s economic and financial future. In fact, questions remain whether the nation can live up to its obligations and implement necessary structural reforms. Massive cuts to government-funded jobs and increasing the age requirement for pension benefits that currently start at 58 years old are just a couple of the large scale steps the government could take to control its financial path.
Taking the Driver’s Seat of Your Financial Life
In working with our clients, we help them to become the drivers of their financial futures. When at a crossroads, we encourage our clients to identify their options. For instance, they may be able to address the challenges before them by delaying retirement and working longer, or making changes to their spending and saving behaviors. In the end, we all have the ability to take control of our financial lives. But as most people living in Greece can attest, the decisions aren’t always easy.
Todd Eklund and Joe John
While you can’t rely on what happened yesterday to determine what will take place tomorrow, your past experiences are powerful drivers of your expectations and thoughts about the future. Last week, we shared about the impact of the Eurozone debt crisis on our domestic Treasury bonds. This time around, we’ll provide insight into how the experience we’ve all had for most of our investment lifetimes with bonds most certainly does not reflect the future realities of the bond market and interest rates.
Source: Bianco Research
The chart above tracks 10 year interest rate of Treasury bonds from 1941 to present. The returns of the last 30 years have conditioned us to expect two things from bonds:
Over the last three decades, we’ve witnessed the astonishing decline of interest rates from 15% in 1982 to around 1.5% in the past month. This has meant we have enjoyed not just nice interest yield but also gains on the underlying bond values. Unfortunately, this protracted downward path has caused many of us to set unrealistic forecasts for the future about the safety and yield of bonds.
Interest rates will rise. No one can predict exactly when this will happen. But when they do go up, the mathematics behind how bonds work mean that the value of your bonds (especially long dates ones) will decrease. How?
Imagine that you’re at a park playground. When interest rates are high, think of this as being at the top of a slide. For the last three decades, falling rates have produced investment gains, which have given you the extended thrill of gliding down a 30 year slide. But, as children across the country can attest, a slide’s excitement ends the moment feet hit the ground. At which point, you must scale the ladder again, and this climb illustrates the harsh reality of the present playground we’re in. Climbing rates mean tough times for unmanaged bond investors. And even if rates stay stuck where they are, then the thrill of the slide is still most assuredly over.
For more about the future of Treasury bonds and ideas on how to protect your portfolio, click here to read our recently published white paper, “Bonds: Is this Life Preserver Ready to Pop?”
Sam Miller and Joe John
During last week’s senate hearings on JP Morgan Chase’s recent $2 billion blunder, Jamie Dimon, CEO of the nation’s biggest bank and one of Wall Street’s most influential figures, expressed his concerns about the so-called fiscal cliff:
The one thing to keep in mind about the fiscal cliff is it may not wait until December 31…Markets and businesses may start taking actions before that, which create a slowdown in the economy.
In this post, we’ll provide background about the fiscal cliff, how it threatens to pull us back into a recession, and ways you can address it.
The fiscal cliff is a scary term used to describe the estimated $700 billion of tax increases and spending cuts that are slated to start after the New Year. The biggest chunks of the tax hikes come from the end of both the Bush tax cuts and the Obama administration’s payroll tax cut. Also, the so-called sequester, which was part of the agreement to raise last summer’s debt ceiling, will take effect at the beginning of the year, and temporary stimulus measures will expire. The expectation is that left unchecked it would halt any economic recovery in the US.
Unless Congress acts before January 1, 2012, the tax increases and spending cuts that form the fiscal cliff will automatically take place. So the question is, “What will Congress do?” There are a couple of challenges to making an accurate prediction. First off, the tax hikes and spending reductions will occur during the “lame duck” session of Congress following November’s election. Historically, passing important legislation in an elected official’s final period of office has been a difficult task. Add Washington’s current political divide, and you have a formula for uncertainty.
Below is a chart that tracks a collection of stocks with revenues that are heavily tied to government spending. Combined, this basket of equities is called the Fiscal Cliff Basket*.
From January to the present, the Fiscal Cliff Basket performed nearly 4% worse than the S&P 500.
So when you read headlines about a U.S. economy ready to fall off the edge, the second coming of the Great Recession, and a domestic crisis as dangerous as Eurogeddon, how should you react? It’s time for a reality check. When financial fears and anxieties arise, the first step is to acknowledge the following:
I have no direct control over the future, all I can control are my decisions and my actions right now!
Recognizing what you can’t control—rather than filling you with frustration and hopelessness—frees you to focus on what you can control in your financial life, which are the following levers:
In the future, given the size of our government’s current debt and deficit, regardless of who wins, we can almost certainly expect that Uncle Sam will charge higher taxes as well as provide a lower level of benefits. That means it will be harder to save after tax money and we will also need higher reserves to make our money last throughout our lifetimes. We should expect and plan on that happening. We should all focus on what we can control and expect to make the right adjustments on our controllable levers to be the drivers of our financial lives rather than the victims of the uncontrollable whims of politicians. And after we have done what we can to make smart decisions today, we can go back to nodding in frustration at our elected officials in Washington. The good news is there’ll definitely be something new to worry about after the cliff has passed.
Todd Eklund and Joe John*The Fiscal Cliff Basket is an equal weight basket of 89 stocks with at least 20% of their sales tied to government spending for the last reported year. The basket contains companies across all sectors, with the largest representation in healthcare and industrials. Chart source: FactSet, Goldman Sachs Portfolio Strategy Research
All Greece, All the Time…The Greek parliamentary elections occur on Sunday. One leading faction would like to stick with the euro and austerity measures, the other leading faction wants to keep the euro but renegotiate the austerity measures.
What it means –This situation has been framed as if/then situation. If the New Conservatives win, then Greece will stick with the euro, keep the austerity measures, and partner even more closely with the rest of the euro zone countries. If the Socialists win, then they will immediately renege on the austerity measures and force the other countries to kick them out of the euro zone. If only it were so simple. This saga won’t end on Sunday. If the conservatives win, Greece still cannot pay its bills because the economy is failing. If the socialists win, the financial sector in Greece will immediately seize up. If there is no clear winner, well, we get more of what we have today…uncertainty. Welcome to geopolitical/economic upheaval.
Jobless Claims Move Up to 390,000…According to the Bureau of Labor Statistics, jobless claims are moving the wrong direction, reflecting more layoffs. At the same time, hundreds of thousands of Americans are dropping off of the federal unemployment plan, which is the last lifeline.
What it means –This measure is commonly seen as the leading indicator of employment. The fact that it is getting worse is obviously a bad sign. However, we need to stay focused on what the measure is revealing. It does not reflect a horrific employment situation, as the number is not 500,000 or even 600,000; instead it reflects the consistent slack in employment, which is what keeps a lid on wages.
Egyptian Government More or Less Gutted…According to the Wall Street Journal, a judge ruled the previous election of over one third of legislators to be illegal, putting the development of a constitution and the move away from military rule in jeopardy.
What it means – The most populated country in the Middle East, which has had peaceful if not warm relations with Israel for decades, is on the brink of implosion. A serious blow to the security situation in Egypt could upend the entire region. This is one of those black swan events that could send the price of oil back over $100 or even $120 very quickly. It doesn’t appear that anyone in Egypt is itching for a true armed insurrection, but also doesn’t seem as if any group is emerging as the level-headed alternative to the military group and the current crop of candidates to lead the country.
Inflation Falls to 1.7%…According to the Bureau of Labor and Statistics inflation is lower than 2% over all, and down to 2.3% excluding food and energy. The drop in the price of oil was the big factor.
What it means – The drop in inflation is a precursor to more Fed action. In an amazing piece of timing (note the sarcasm), this drop in inflation comes right before the Fed meeting on 6/19-6/20 next week, and just as the latest Fed action, Operation Twist, is set to expire at the end of June. Look for the Fed to use the combination of events – turmoil in Europe, deterioration in US employment, slowdown in US economic activity, and drop in inflation to trot out another monetary operation. This has been well covered by Bill Gross of PIMCO, who put his money where his mouth is, buying mortgage-backed bonds ahead of any Fed action.
Doug De Groote, MBA, CFP®
Managing Director, Westlake Village, CA